Institutions and economic growth in Africa: Evidence from panel estimation

There is growing emphasis on the role of institutions on explaining Africa’s economic growth ahead of the traditional factors such as capital accumulation. However, it is not clear which of the institutions and governance indicators namely control of corruption, government effectiveness, political stability, regulatory quality, rule of law and voice and accountability matter most. This paper empirically examines the impact of institutions on economic growth in Africa. The paper uses a sample of 48 countries for the1996-2016period. The overall number of observations is 912. The paper applied generalized methods of moment (GMM), fixed effects (FE) and random effects (RE) models. However, due to the fact that GMM is well suited to deal with potential endogeneity problems in the model, inferential statistics of this paper are drawn from GMM regression results. Results of the FE and RE regressions are presented in appendix. Empirical results show that institutions really matter for Africa’s economic growth. Among the institutional quality indicators political stability appears to be the most significant factor in explaining real GDP per capita growth in Africa. However, it is worth noting that, the quality of institutions alone may not be sufficient. Along with institutions, the paper reveals that structural factors such as liberalization of trade, fixed capital formation, labour force and foreign direct investment have a significant effect on Africa’s economic growth. The implication is that, a policy mix with the aim of improving the quality of institutions as well as reducing trade restrictions, enhancing both domestic and foreign investment and improving the quality of labour force would enhance economic growth in Africa.